Ohio Courts Uphold AIA A-201 General Conditions Pre-loss "Waiver of Subrogation" Clause

As contractors are aware, Sections 11.3.5 and 11.3.7 of AIA A-201 General Conditions provide for a waiver of the owner’s rights against a contractor to the extent that property insurance covers a loss to the owner’s property. This waiver applies even if the contractor was negligent and caused the loss in question, provided that the loss is otherwise covered by the applicable property insurance policy. As a result, if a covered loss occurs to “work” at the project or occurs to adjoining and adjacent property covered by property insurance, the insurer should pay the claim without having rights of recovery (often referred to as “rights of subrogation”) against the contractor.

In the case of The Summit Country Day School v. Republic-Franklin Insurance Company, Appeal No. C-070044 (1st Dist. March 26, 2008), cert. denied, 2008-0916 (Ohio 2008), an Ohio appellate court recently ruled that these AIA A-201 provisions are enforceable and eliminate an insurance carrier’s rights of subrogation against the contractor. The court also held that these provisions do not violate Ohio public policy or Ohio law; specifically, they do not violate Ohio’s anti-indemnity statute, O.R.C. § 2305.31. Finally, the pre-loss waiver of subrogation applies not only to loss to the “work” being performed by the contractor, but also to damage to adjacent and adjoining property which is not part of the “work” at the project.

In 2003, the Summit Country Day School entered into a construction agreement with respect to the construction of a new school building at Summit’s campus in Cincinnati, Ohio. The Project site was located immediately adjacent to an existing building on Summit’s campus. During the project, a portion of the adjacent existing building collapsed.

Summit subsequently filed a lawsuit against its property insurer. This property policy insured the existing adjacent building that collapsed, but the carrier did not provide the Builders Risk coverage for the new building project. In the lawsuit, the insurance carrier asserted that it had no duty to pay. Although the construction contract included the AIA A-201 General Conditions, including sections 11.3.5 and 11.37 that provide for a pre-loss waiver, the insurance carrier asserted that it had rights of subrogation against the contractor. The carrier further contended that the pre-loss waiver only applied to the Builders Risk policy covering the project. It also asserted that the pre-loss waiver did not apply to “non-work” property such as existing building that had collapsed. The insurance carrier argued that even if the pre-loss waiver was enforceable, it applied only to the “work” at the project site.

Both the trial court and the First District Court of Appeals rejected the insurance carrier’s arguments. The courts ruled that sections 11.3.5 and 11.3.7 of the AIA A-201 were enforceable under Ohio law and eliminated the insurance carrier’s right of subrogation against the contractor. The Court of Appeals specifically noted that the insurance carrier used standard language in its insurance policy to permit an insured to enter into a written waiver of its rights before a loss occurred. The courts also rejected the insurer’s argument that Ohio’s anti-indemnity law, O.R.C. § 2305.31, applied. Finally, the courts did not accept insurance carrier’s arguments that the waiver only applied to the “work” at the project, as 11.3.5 of the A-201 extends the waiver to adjoining and adjacent property. The Ohio Supreme Court later refused the insurance carrier’s request to review the case, allowing the lower court decisions to stand.

Frost Brown Todd represented Summit in this case, and participated in the briefing and oral arguments to enforce the pre-loss waiver of rights contained in standard construction contracts. 

Posted by: Scott R. Brown

Categories: Claims / Dispute Resolution, Construction Contracts, Risk Management / Insurance